VDD for M&D: The Increased Need for Sell-Side Due Diligence Preparation

2018 was a record-setting year for middle-market M&A transactions, according to PitchBook, one of the foremost industry intel and data providers. The numbers, which you can see below, show that the U.S. economy has fully recovered from the lulls of the 2008 recession.

As M&A deal volume has expanded in the past ten years, valuation multiples have grown richer as well. There is a great deal of demand for middle-market companies especially in the manufacturing & distribution industry, both from financial buyers (private equity funds and family offices) and strategic acquirers (publicly-traded companies and privately-held enterprises).

Another trend starting to break into the lower end of the middle market - defined as companies with less than $20M in EBITDA - is an increased number of investment bankers who now advise business owners to obtain a vendor due diligence (VDD) report, before putting their companies up for sale.

What is a vendor due diligence report? Put simply, it is a quality of earnings report prepared by a seller on his/her business. Usually buyers hire an accounting or consulting firm to perform financial and tax due diligence on a company and to prepare a quality of earnings report. Nowadays, more often than not, sellers preempt the due diligence process and hire CPA firms to prepare the same report, which can be shared with prospective buyers, on their business.

VDD reports add more credibility to the numbers used in a valuation because the company will validate its normalized EBITDA and net working capital analyses prior to going to market. VDD reports also tend to shorten the sales process, since buyers use the VDD report to perform their own due diligence. The advance preparation also prevents surprises, which could lead to a decreased sales price or even a broken deal process.

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